Oil stocks have been on the rise and BP PLC (BP) has jumped along with the sector. BP shares were trading around $42 in early January, and have gained about 15% in just a few weeks. With this recent run, it makes sense to consider taking profits. BP shares are trading well above key support levels, and longer-term investors should consider waiting for pullbacks to either the 50-day moving average of $44.68, or better yet the 200-day moving average of $42.43.
The company is facing continuing headline risk and has legal issues stemming from the oil spill in the Gulf of Mexico. As one recent article states about the ongoing litigation and potential fines:
BP has to weigh its chances of getting off cheaper by piecing together a sweeping settlement or put its fate in the hands of one man, a federal judge who will hear testimony in lieu of a jury. If the judge sides with plaintiffs on the amount of oil spilled and determines BP was grossly negligent, the company conceivably could face up to $52 billion in environmental fines and compensation alone, according to an AP analysis.
While there is a strong chance the company will be able to settle the civil case for less than $52 billion figure, there are still potentially large criminal fines and penalties due to alleged violations of clean water, wildlife and pollution laws. These issues could cost the company billions of dollars more and it could take much longer to resolve these potential claims.
Investors who have been buying the stock over hopes of a quick resolution are likely to be disappointed with the company still facing potentially substantial fines. BP shares have traded at a discount to many other leading oil companies, ever since the spill. However, that is not the case anymore, and that is why taking profits could be the best strategy now. BP is expected to earn about $6 per share for 2012, and that puts the price to earnings ratio at about 8 times earnings.
By contrast, Chevron (CVX) is trading around $109, and it is expected to earn about $12.66 per share. This puts the price to earnings ratio at a similar 8 times earnings. The difference is that Chevron shareholders are not facing the same level of future headline risks or legal uncertainties that come with the BP oil spill. The recent run-up in BP shares is a solid opportunity for some investors to take profits and wait for the next pullback.
BP PLC. is one of the largest integrated oil and gas company in the world and is based in Europe. After a gain of about 15% in just the past several weeks, investors might want to consider taking profits. The stock would be a better buy on pullbacks.
Here are some key points for BP:
Current share price: $47.84
The 52 week range is $33.62 to $49.09
Earnings estimates for 2011: $6.42 per share
Earnings estimates for 2012: $6.83 per share
Annual dividend: $1.92 per share which yields 4.1%
Chevron Corporation is a top pick for many oil investors. It offers a solid dividend yield, a low price to earnings multiple and it does not have the same headline risks that BP shareholders are faced with.
Here are some key points for CVX:
Current share price: $109.61
The 52 week range is $86.68 to $110.99
Earnings estimates for 2012: $12.66 per share
Earnings estimates for 2013: $13.20 per share
Annual dividend: $3.42 per share which yields 3%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.